Obama: Right Economic Formula, Wrong Variables

Why shouldn't business lead the way back to prosperity?


America has a big economic problem, but it's not income inequality or income volatility or economic insecurity. Those are just symptoms. The problem is a lack of sustained or even spectacular economic growth. Consider this: During the 1980s, the economy notched 19 quarters of 3.5 percent GDP growth or better. In the 1990s, the economy also notched 19 quarters of 3.5 percent growth or better. So far this decade? Just eight. Or look at the number of quarters of "hypergrowth," say, 5 percent or better. (This was JFK's GDP goal in the 1960s, by the way.) There were 12 in the '80s, eight in the '90s. So far this decade? Just a single quarter, the third quarter of 2003.

That's why I am heartened by Barack Obama's decision to go for growth. As Obama puts it, there are two deficits that we need to deal with, an investment deficit and a budget deficit. (I tend to agree.) And given the weak state of the economy, he thinks the former deserves emphasis over the latter. (I tend to agree.) The best way to balance a budget is to grow the economy first, reduce the budget deficit second. As such, Obama wants to boost growth, long and short term, through government spending on energy and infrastructure. Budget balancing will have to wait.

Now there's your trouble. Economic textbooks say there are four variables that make up economic growth, at least as measured by GDP: government spending, investment by business, consumer spending, and net exports. G+I+C+E =GDP. Obama's problem is that he focuses on the "G" and has forgotten about the "I"—business investment. Remember, the 1990s boom that Democrats like to talk about was a boom led by business investment, not government spending. Why not employ that formula again? Cut business and investment taxes and let entrepreneurial capitalism do its thing. ( And at the same time fix entitlements.) Consider this passage from Lawrence Kudlow's must-read book from the '90s, American Abundance:

I am reminded of my two favorite heads of state who inherited large deficits and debt and were able to retire them through supply-side means. One was the famous Victorian British Prime Minister William Ewart Gladstone. Gladstone was Chancellor of the Exchecquer when Peel repealed the Corn Laws. Those were steep tariffs, as were the tax rates of the day. Gladstone also eliminated most taxes throughout the U.K. and in so doing grew the British economy to a point that virtually all of England's Napoleonic War-related debt could be retired. In this country in the 1920s, Calvin Coolidge...lowered income tax rates and at the same time extinguished post-WWI debt and put the budget in surplus. First he cut taxes, then he waited for economic growth, then he retired the debt. First, Gladstone cut tariffs, then he waited for economic growth, then he paid down the debt.